The poor old pound

By Ben Amrany, May 19, 2011
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In the past quarter, the pound had been on a steady decline against a basket of major currencies.

The only real shining light has been its rate against the US Dollar - in excess of 1.60 for much of the time. Earlier this month, we hit a high of around 1.67, which was a welcomed boost on the back of the Federal Reserve (FED) looking more and more unlikely to be raising US interest rates anytime soon.

During this month, trading at the high point compared to the low could have achieved $10,180 more on a £200,000 purchase.

Each month, every country sets their interest rates for the month ahead. The interest rate decision undoubtedly drives each country's exchange rate along with their own respective economic data.

The pound looks set to linger at low levels until we see a rise in the cost of borrowing

This month's decisions in the UK and Euro zone really did highlight this. GBP weakened to a low of 1.1054 against the EUR after the interest rate decision led to expectation that in the UK rates would be left on hold until nearer the end of the year. Whereas in the Euro zone it was deemed that a further rate hike may only be a couple of months away.

Then the pound went on a steady rise as the market eagerly awaited the Bank of England's Quarterly Inflation report. The recently released data was key to sterling gaining against a host of currencies, most noticeably against the Euro.

The report suggested that inflation would rise to around five per cent - which would be well above the target two per cent level - until at least 2013. Couple this with Bank of England Governor Mervyn King hinting that interest rates will begin to rise towards the end of the year and the pound gained significantly, up to a level of 1.1527. In the space of a week, rates rose by five cents and in real terms, you could have gained an extra €9,460 on a £200,000 purchase if you bought the currency at the high (1.1527) compared to the previous weeks low of 1.1054.

Looking forward, if you are planning for your summer holidays or considering emigrating or buying a holiday home overseas, then it seems that sterling exchange rates will more than likely linger at low levels until we begin to see a rise in the cost of borrowing in Britain.

In Israel, interest rates recently rose and the Shekel strengthened by around four per cent against the pound. For those of you that will require a purchase of currency, let's keep everything crossed that by the end of the year the UK raises interest rates and the pound gains against a basket of major currencies once more.

Ben Amrany is a proprietary trader with Currencies.co.uk

    Last updated: 11:02am, May 19 2011